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Monetary Banking#

Review of Key Content in Monetary Banking

1. Money is a product of commodity exchange, an inevitable result of the development of the value form of commodities, and serves as a general equivalent.

2. Functions of money: measure of value, means of circulation, means of storage, means of payment, and world currency.

3. Stages of money development (three forms): commodity money, representative money, and credit money.

4. Classification of money levels: classified according to liquidity.

5. M0: cash in circulation, with the strongest liquidity.

6. M1: commonly referred to as narrow money. It refers to transaction money, including various currencies actually used for transactions. That is, M1 = C + Dd. Where C is cash in circulation, and D is demand deposits or checking deposits (which can be converted into cash at any time). M1 is the most active part of the money supply, representing the immediate demand of society and reflecting the short-term economic operation status.

7. M2: broad money. It refers to M1 plus items that are less liquid and cannot be directly used as payment instruments but can be conveniently converted into payment instruments, that is, M2 = M1 + Ds + Dt + other short-term liquid assets. Where Ds is savings deposits, and Dt is time deposits.

8. M3: M3 = M2 + Dn (liabilities issued by non-bank financial intermediaries).

9. Standard currency: the standard currency specified by a country's monetary system.

Sub-currency: Sub-currency is the counterpart of the main currency, which is small denomination currency below the unit of the standard currency, used for daily transactions and change.

Monetary System:

1. Silver standard: the earliest monetary system.

2. Bimetallism: both silver and gold serve as standard currencies. (Including dual standard and parallel standard)

3. Gold standard: refers to a monetary system that uses gold as the standard currency material. (Including gold coin standard, gold bullion standard, and gold exchange standard)

4. Paper currency standard: refers to a monetary system in which a country's standard currency uses paper currency without any connection to gold.

5. 1. Credit is a borrowing behavior.

6. Characteristics of credit: 1 Credit is a unilateral application of value conditioned on repayment and interest payment. 2 It is a special form of value movement. 3 It reflects a borrowing relationship.

7. Constituent elements: creditor and debtor, time interval, credit instruments.

8. Forms of credit

9. Commercial credit: refers to the credit provided between selling and buying enterprises during the sale of goods.

Characteristics: 1 The object is the credit provided in the form of goods. 2 Commercial credit has duality; the credit granting enterprise and the credit receiving enterprise are both in a buying and selling relationship and a borrowing relationship. 3 The subjects of commercial credit, that is, the creditors and debtors of commercial credit, are all industrial and commercial enterprises. 4 The dynamics of commercial credit parallel the dynamics of industrial capital.

2. Bank credit: refers to the credit provided by banks or other financial institutions in the form of deposits and loans, mainly in monetary form, and is the main subject of contemporary credit economy.

Characteristics: 1 The scale of credit is not limited by the amount of monetary capital. 2 Bank credit has wide acceptability. 3 Bank credit has relatively strong planning.

3. National credit: also known as government credit. It refers to the government raising funds from the public through borrowing and providing loans to society. Characteristics: the main forms of government credit are treasury bonds and public bonds, with creditors being domestic citizens and debtors being the state or government. The government credit method is loans. Functions: to adjust government revenue and expenditure imbalances, to make up for fiscal deficits, to regulate currency circulation and economic development, and to create good social conditions for economic development.

4. Consumer credit: refers to the credit provided by enterprises and banks or other financial institutions to individual consumers for personal consumption. Methods: installment sales, consumer loans, credit cards. Functions: to enhance purchasing power, stimulate consumer demand, promote production development, etc., please elaborate.

5. Personal credit

6. Economic functions of credit: 1. Regulate the national economy. 1 Regulate the total economy: credit relationships direct surplus funds from surplus sectors to deficit sectors, which are used for consumption and investment, preventing the overall monetary circulation from shrinking and ensuring the normal operation of monetary circulation and stable development of the national economy. In short, through credit relationships, the monetary supply in the national economy is adjusted to align with monetary demand, ensuring the balance of total social supply and demand. 2 Regulate economic structure: credit can adjust demand structure and income structure through interest rate changes and shifts in credit direction to achieve adjustments in product structure, industrial structure, employment structure, and even economic structure. It can also adjust international trade and balance of payments through exchange rate adjustments and the development of international credit relationships, thus achieving coordinated development of external economies. 2. Effectively allocate economic resources. 1 Credit can enhance the overall utility of the economy: the existence of credit channels promotes the improvement of resource allocation efficiency. Different households and individuals have different expectations and arrangements for current and future consumption. The development of credit allows households that do not prioritize current consumption to transfer part of their income in the form of savings through credit institutions to those households that value current consumption but have lower expectations for future consumption, achieving a conversion between current and future consumption, allowing each household to optimally allocate its consumption resources over time, thus improving the overall utility of consumption. 2 Credit can promote the expansion of effective scale investment: social economic growth requires expanded reproduction, which necessitates additional investment. Investment funds mainly come from bank loans, and the expansion of loan scale comes from the growth of savings, thus savings are a prerequisite for investment. In the process of transforming savings into investment, bank credit often needs to guide and promote this transformation. Only by transferring the investment rights of savings through credit relationships to those units with higher marginal productivity of capital can the overall productivity level of society and the efficiency of resource allocation be improved, thus promoting the expansion of effective investment scale.

7. Interest rates.

8. Nominal interest rate: refers to the interest rate that has not been adjusted for inflation. Real interest rate: refers to the interest rate adjusted for price changes, under the condition of unchanged purchasing power of money. Nominal interest rate = Real interest rate + Inflation rate.

If the nominal interest rate remains unchanged and prices fall during the borrowing period, the real interest rate is higher than the nominal interest rate, which is favorable for lenders and unfavorable for borrowers; if the nominal interest rate remains unchanged and prices rise, it is unfavorable for lenders and favorable for borrowers. When the inflation rate exceeds the nominal interest rate, the real interest rate is negative.

2. Calculation of interest rates: Compound interest: If interest is calculated M times in a year, then the compound interest for N years is:

S=P×(1+r/m)^(m*n)

Future value (FV), also known as future value or principal plus interest, refers to the value of a certain amount of funds at a future point in time. Present value (PV) refers to the value of a certain amount of cash at a future point in time discounted to the present, commonly referred to as "principal." Usually denoted as P.

FV=P×(1+r)^n

PV=P÷(1+r)^n

Yield to maturity: Yield to maturity refers to the income obtained from holding a bond until maturity, including all interest due at maturity. The yield to maturity is the discount rate that equates the present value of the returns from the debt instrument to its current value.

3. Main factors determining interest rate levels: average profit rate, supply and demand for funds, price level, interest rate policy, international interest rate levels.

4. Structure of interest rates: risk structure of interest rates (default risk, liquidity, income tax) and term structure of interest rates.

Three theories of the term structure of interest rates: 1 Pure expectations hypothesis: explains the term structure based on expected short-term interest rates. 2 Liquidity preference hypothesis: believes that the term structure of interest rates is determined by expectations of future interest rates and the risk premium for interest rate risk. 3 Market segmentation theory: different term bond markets are independent segmented markets, and the interest rates for bonds of various terms are determined by the supply and demand for those bonds.

10. Basic characteristics of credit instruments:

11. Term 2. Liquidity 3. Safety (default risk, market risk, purchasing power risk) 4. Yield (real yield, which refers to the ratio of the annual average yield of the credit instrument to its market price)

12. Classification of credit instruments: 1. By liquidity, fully liquid financing instruments (cash and demand deposits) and financial instruments with limited liquidity (commercial paper, stocks, etc.)

13. By the nature of the issuer, direct securities and indirect securities

14. By the length of repayment period, short-term financing instruments and long-term financing instruments

15. 1. Commercial paper: 1 Promissory note: a debt certificate issued by the debtor to the creditor promising to pay a certain amount within a specified period. 2 Bill of exchange: a payment order issued by the creditor to the debtor, instructing him to pay a certain amount to a designated payee or holder within a specified period.

16. Bank notes: 1 Bank certificates 2 Checks 3 Large transferable time deposits (CDs)

17. Government bonds: 1 Public bonds: medium to long-term public bonds are mostly coupon bonds 2 Treasury bills: belong to zero-coupon bonds.

18. Securities of joint-stock enterprises: 1 Stocks 2 Corporate bonds

19. Financial bonds: Financial bonds are bonds issued by banks and other non-bank financial institutions to raise funds. They change the asset-liability structure by issuing financial bonds, increasing funding sources, and actively incurring liabilities. Mainly medium to long-term.

20. Innovations to avoid interest rate risk

21. Large transferable time deposits (CDs). Characteristics: large and fixed denominations, non-negotiable, fixed or floating interest rates, short deposit terms, tradable and active in the secondary market, with good profitability, safety, and liquidity.

22. Money market mutual funds

23. Floating rate notes (LIBOR, which refers to the interest rate for short-term loans between banks in London, considered the benchmark interest rate for the London financial market)

24. Convertible bonds

25. Options (call options and put options) (If a bond is expected to have an interest rate increase, what credit instruments will be used to avoid risk? Purchase put options or others? Multiple choice or single choice?)

Call option expiration yield: Buyer = (market price - exercise price) × number of contracts [market price > exercise price]

Buyer = 0 [market price ≤ exercise price]

Seller = (exercise price - market price) × number of contracts [market price > exercise price]

Seller = 0 [market price ≤ exercise price]

Put option expiration yield: Buyer = (exercise price - market price) × number of contracts [market price < exercise price]

Buyer = 0 [market price ≥ exercise price]

Seller = (market price - exercise price) × number of contracts [market price < exercise price]

Seller = 0 [market price ≥ exercise price]

Option expiration profit: Buyer = expiration yield - option premium

Seller = expiration yield + option premium

6. Forward rate agreements

7. Swaps: a financial derivative contract in which both parties agree to exchange a series of cash flows on a future date.

8. Innovations to avoid exchange rate risk: selection of bonds, foreign exchange options

9. Innovations to avoid regulatory constraints: 1. Automatic transfer service accounts (ATS) 2. Transferable payment order accounts (NOW) 3. Money market mutual funds (MMMF) 4. Money market deposit accounts (MMDA) 5. Repurchase agreements.

10. Commercial banks.

11. Nature: Commercial banks are financial enterprises aimed at maximizing profits.

12. Functional characteristics: 1 (financial intermediaries) Commercial banks are banks that specifically handle monetary credit business, acting as credit intermediaries and payment intermediaries for enterprises and individuals. 2 Commercial banks are banks that create derivative deposits and credit instruments. 3 Commercial banks are the core medium for the transmission of central bank monetary policy. 4 Modern commercial banks are financial department stores.

13. Organizational forms: unit banking system, branch banking system, bank holding company

14. Main businesses: 1 Liability business [most liquid]

Deposits (demand deposits, time deposits, savings deposits)

Loans (interbank loans, rediscounting and repurchase loans, rediscounting and relending from the central bank, borrowing from the international financial market.) Discounting: Discounting refers to the act of transferring a forward bill of exchange by the holder before the bill has matured in the discount market, where the transferee deducts the discount interest and pays the bill amount to the transferor. Or the bank's purchase of bills that have not matured.

2 Asset business. (loans, investments, other assets)

3 Intermediate business.

Settlement business: remittances, collections, letter of credit settlements.

Agency business: agency payment and collection business, agency financing business, agency promotion of securities business

Trust business

Leasing business: operating leases and financing leases (a commonly used long-term leasing form internationally, where the selection and maintenance of the leased item are the responsibility of the lessee, who usually acquires ownership of the equipment at a symbolic price after the lease period ends.)

Consulting business.

17. 1. Specialized banks (referring to financial institutions that do not engage in retail business and only provide specialized financial services within a specific scope): Development banks (non-profit policy-oriented specialized banks), savings banks

18. Non-bank financial institutions: investment banks, commercial banks, central banks, and financial institutions outside specialized banks.

19. Insurance companies 2. Finance companies 3. Brokers and securities dealers 4. Leasing companies 5. Financial companies

20. Differences between investment banks and commercial banks:

First, from the source of funds: Investment banks mainly raise funds through issuing their own stocks and bonds. Commercial banks mainly source funds from various deposits and other borrowed funds.

Second, from the main business: Investment banks mainly engage in securities underwriting, trading, the creation and trading of derivatives, mergers and acquisitions, and related services and financing; while commercial banks mainly deal with deposits and loans and financial services.

Third, from the main functions: Investment banks provide direct financing services to enterprises, while commercial banks can only provide indirect financing.

Fourth, from the source of profits: Investment banks earn profits from commissions, fees, and financing income, while commercial banks earn profits from interest rate spreads and service income.

Finally, from the regulatory agencies: Investment banks are mostly regulated by securities regulatory departments, while commercial banks are mainly regulated by central banks.

19. Central banks: Central banks are the core of a country's financial system, the highest, comprehensive, and special financial organization, and one of the important regulatory institutions of the national macroeconomy. In today's highly developed commodity economy and financial industry, it is responsible for supervising and managing, ensuring the sound and stable development of the national financial system, implementing monetary policy, controlling the overall credit scale of society, and the special responsibilities of the money supply.

The establishment of the Bank of England marks the development of modern banking.

1. Nature: Legally, the central bank is responsible to society and is the highest management authority in a country's financial system. It is the agent of the government in the financial sector, regardless of who owns the capital, it should be regarded as a functional department of the government or a financial management institution under government control. Economically, the central bank is a bank that handles deposits, loans, and settlement business, but its customers are different from those of other financial institutions, thus it is a special bank.

The central bank is both an institution and a bank.

2. Functions: The central bank is the "issuing bank." It monopolizes the right to issue currency.

The central bank is the "government's bank." As an important tool for the government to regulate the macroeconomy, the central bank implements monetary policy, acts as the treasury, buys and sells government securities, accepts government deposits, and provides necessary short-term financing to the government. It acts as the government's financial advisor, participates in international financial activities, and promotes the internationalization of the national economy. It maintains exchange rate stability.

The central bank is the "bank of banks." It is responsible for safeguarding the deposits that commercial banks and other deposit-taking financial institutions are required to hold and adjusts the statutory reserve ratio according to the financial market situation. It handles refinancing and rediscounting business for commercial banks. It is the national bill clearing center. It supervises and manages the national banking system and its financial activities.

Policy functions: reflected in the central bank's responsibility for formulating and implementing the country's monetary policy.

Supervisory and management functions: reflected in its supervision and management of the banking system, financial business, financial markets, and the macro execution of monetary policy.

Research functions: The research function of the central bank refers to its position as the nerve center of the national economy and the hub of the credit system, mastering various data and information, collecting and organizing various economic information, accurately predicting, and timely researching and formulating relevant financial policy plans for government decision-making and reference. Research intelligence is a supplement to the central bank's policy functions and plays an important role in strengthening the central bank's policy functions.

Development or promotion functions: the ability to promote financial deepening.

3. Organizational forms:

Single central bank system (most widely used in the world): also known as "unitary central bank system," refers to the establishment of a single central bank within a country.

Composite central bank system (often adopted by federal countries): also known as "dual central bank system," refers to a system in which a central bank institution is established at the central level and several local-level central bank institutions are established at the local level.

Transnational central bank system (European Union); quasi-central bank system (Singapore, Luxembourg, Fiji, Hong Kong)

A unified central bank system (the Soviet Union and Eastern European countries after the 1960s and China before economic reform implemented this system)

20. Basic principles of commercial bank management: profitability principle, safety principle, liquidity principle.

21. Safety principle: credit risk, market risk, management risk.

6C: quality, ability, capital, collateral, operating conditions, continuity

5P: personal factors, purpose of funds, repayment factors, security factors, outlook.

2. Liquidity principle: The liquidity of a bank includes the liquidity of assets (three aspects) and the liquidity of liabilities (two aspects).

3. Main measures of asset-liability joint management:

4. Interest rate sensitivity gap management measures: When interest rate trends are clear and last for a long time, adopt an aggressive strategy; conversely, when interest rates fluctuate unpredictably, a defensive strategy should be adopted.

5. Duration management

Duration refers to the average time required for a financial instrument to recover its present value at a certain yield to maturity.

Definition:

D is the duration; t is the time of each cash flow occurrence; Ct is the cash flow of the financial instrument in the t period; r is the market interest rate.

22. Why does information asymmetry occur?

Information products have quasi-publicity, indivisibility, and value post-factum. Their value can only be measured post-factum, easily forming information asymmetry between the two parties in a transaction, leading to two phenomena: adverse selection and moral hazard. Information is scarce, and obtaining information incurs certain costs. Private information is information owned by one person that others must pay to obtain—information asymmetry. There are two forms of information asymmetry: hidden information and hidden behavior.

Information cannot be evenly distributed from the moment it is generated; interest relations hinder the disclosure of information.

Adverse selection: the phenomenon of mixing good with bad and confusing the true with the false.

Main measures to reduce risk:

1. Reduce internal information asymmetry: improve the internal credit operation management mechanism of banks.

2. Set up reasonable organizational structures and improve internal control mechanisms.

3. Increase technical support, fully utilize advanced tools.

4. Overcome the adverse selection and moral hazard caused by information asymmetry between enterprises and banks.

5. Screening and monitoring

6. Establish long-term relationships with borrowing clients

7. Collateral and establish compensatory balance accounts—mitigating the consequences of adverse selection and moral hazard.

8. Strengthen communication within the industry to jointly prevent information asymmetry.

9. Establish a credit system and social credit management system.

10. Establish correct public opinion guidance and cultivate social credit awareness.

11. Establish and improve the social credit management system as soon as possible.

12. Establish a credit guarantee system.

The capital composition of banks: equity capital, debt capital, loss reserves, and capital reserves.

Why is capital adequacy management necessary?

1. It is conducive to fair competition among banks. 2. It is conducive to controlling the scale of credit and improving asset quality. 3. It can protect depositors' interests. 4. It is conducive to promoting internal reform of banks and improving their profitability. 5. It is conducive to promoting innovation in state-owned commercial banks.

2. Financial markets.

3. Direct financing: the process by which the supply and demand sides of funds directly negotiate or buy and sell direct securities in the open market.

4. Indirect financing: the financing method in which surplus units and deficit units conduct financing through financial institutions as intermediaries.

5. Differences between direct and indirect financing:

6. Different subjects of financing behavior: Direct financing involves only the fundraisers and investors, while other institutions only provide services for financing without substantial value transfer; indirect financing involves fundraisers, investors, and financial institutions, with financial institutions being the central subject of fund circulation.

7. Different modes of financing movement: In direct financing, transactions have only one process, where funds flow from surplus to deficit through the purchase of securities; indirect financing has two processes, where surplus units deposit funds into financial intermediary institutions, which then transfer funds to deficit units through loans or investments.

8. Different costs and risks of financing: In terms of cost, indirect financing costs include interest and operating expenses of the banking sector, while direct financing costs mainly include dividends and interest on stocks and securities, as well as issuance costs of securities. Therefore, the cost of indirect credit is lower. In terms of risk, for initial investors, the risks of stocks and bonds are higher than bank deposits, meaning the risk of direct financing is higher than that of indirect financing.

9. Different impacts on the money circulation volume: The subject of indirect financing is banks, which can create credit money through absorbing deposits and handling transfer settlements, thus deriving multiples of initial money. Therefore, the scale of indirect financing directly affects the money circulation volume. In contrast, direct financing impacts on the money circulation volume vary depending on the duration.

Although direct financing is relatively straightforward, it has limitations in its applicability, and its financing efficiency is relatively low, with high costs and risks. Therefore, indirect financing plays a very important role in modern economies and is continuously developing.

From the perspective of the entire financial field, direct and indirect financing complement each other, and both play important roles in economic development.

4. Classification of financial markets:

5. By the duration of the trading objects, money market and capital market

6. By financing instruments, securities market, commercial paper market, transferable time deposit market

7. By different types of trading objects, domestic currency market, foreign exchange market, gold market, securities market, spot market, futures market.

8. By the nature and method of financial transactions, lending market, leasing market, securities market, open market, bargaining market

9. By geographical scope, domestic financial market and international financial market

10. Money market and capital market.

11. Money market: refers to the sum of the supply and demand places and their price operating mechanisms formed by trading short-term financial instruments within one year.

12. Characteristics of the money market: short trading duration, low risk, strong liquidity.

13. Functions of the money market: adjustment function, indicator function, connector function, the money market is an important place for the central bank to implement monetary policy.

14. Interbank lending market: refers to the market for short-term fund borrowing and lending between financial institutions such as banks. Participants include commercial banks and other financial institutions.

15. Characteristics of the interbank lending market:

16. Short financing period (one day or several hours) 2. Transaction interbank (must be between financial institutions) 3. Large transaction volume (transactions are large and do not require guarantees) 4. Reference interest rate LIBOR (mainly refers to the highly marketized interest rate) 5. Intangible market (after reaching an agreement through telephone negotiation, automatic clearing through the central bank)

17. Interbank lending: refers to short-term borrowing conducted by financial institutions (mainly commercial banks) to adjust fund surpluses and deficits, utilizing the time difference, spatial difference, and interbank difference in fund circulation.

18. Short-term bill market:

Treasury bill market (short duration, high liquidity, high safety, regarded as zero-risk bonds or gilt-edged bonds; non-negotiable form)

Large transferable time deposit market (CD): (the issuing unit is each commercial bank)

Characteristics: non-negotiable, non-replaceable; deposit amounts are integers and very large; short duration, with a minimum of fourteen days, mostly within one year.

8. Repurchase market: refers to the market for short-term financing conducted through repurchase agreements.

Reverse repurchase: the fund demander sells securities while signing an agreement to repurchase them at a later date at the agreed price.

Repurchase price: RP=P(1+r*t/360)

9. Capital market: also known as the long-term financial market, refers to the sum of various fund borrowing and securities trading venues and their operating mechanisms with a duration of more than one year.

10. Functions of the capital market: fund circulation, property rights mediation, resource allocation.

11. Securities market: the place for issuing and trading various securities such as stocks, bonds, and investment fund certificates.

12. Securities issuance market: also known as the primary market. It is the market formed by issuing securities, where the issuer sells new securities to investors according to certain legal regulations and issuance procedures to expand operations.

Issuance methods: public offering; private placement (only targeting specific investors, small scope) private placement is further divided into internal allocation and private allocation.

Internal allocation refers to: a joint-stock company allocating new stock subscription rights to existing shareholders at the stock's par value.

Private placement refers to: selling new stocks to special relationships such as employees and clients of the company, excluding shareholders.

Issuance channels: self-issuance; through intermediaries (investment banks, securities companies, law firms, accounting firms)

[Main work of investment banks: a. Design fundraising plans (price, amount, time) b. Find law firms and accounting firms c. Edit documents d. Market securities (underwriting, agency, assistance).]

Among them, underwriting, agency, and assistance belong to public offerings (services provided for initial issuance).

13. Securities circulation market (the place for realizing circulation transfer): also known as the secondary market. It refers to the market for buying and selling already issued securities. It consists of stock exchanges and over-the-counter trading markets.

14. Stock exchange (competitive transaction) [The largest stock exchange in the world is the New York Stock Exchange]

Membership qualifications:

1. Commission brokers. Characteristics: Commission brokers accept client commissions for securities trading, acting as intermediaries between both parties and charging commissions.

2. Floor brokers. Characteristics: Help busy commission brokers execute tasks.

3. Floor traders: refer to those who mainly buy and sell for themselves within the stock exchange and earn price differences while maintaining trading continuity. However, this may lead to abnormal price fluctuations.

4. Special traders (market makers): receive, safeguard, and execute orders sent by various brokers and charge commissions. They are always ready to buy and sell on their accounts to maintain fairness. Characteristics: one person can manage multiple stocks, but one stock can only be managed by one person.

Three types of orders:

Market order: The client does not specify a price and trades at the best market price.

Limit order: A specific price level, a price level that is more favorable than that price level.

Stop-loss order: The client instructs the broker to sell or buy immediately when the price fluctuates beyond a certain direction.

15. Over-the-counter trading market (negotiated transactions): refers to the intangible trading network established by dealers through computers, telephones, and other communication tools for buying and selling securities.

OTC characteristics: 1 Intangible, trading through networks. 2 Low listing threshold, any security can be traded without requiring public disclosure of the company's financial status. 3 Transactions can be conducted through brokers or directly with clients. 4 The trading parties can negotiate prices.

16. Differences between futures and forward contracts.

Characteristics of futures: standardized; no default risk; futures contracts require margin deposits; the actual delivery rate of futures is very low, which can hedge.

Forward contracts: unstandardized; high default risk; no margin deposits; contracts must be delivered upon expiration, and hedging is not allowed.

25. Zero-coupon bonds.

Pz is the price of a zero-coupon bond, with the market interest rate being r, assuming the zero-coupon bond has a term of n (usually less than one year), F is the face value of the zero-coupon bond; it is repaid at face value upon maturity. Then

Pz=F/(1+r*n/12)

26. 1. Base money: refers to the sum of reserves held by commercial banks and cash held by the public outside the banking system. It is the basis for the multiplier expansion of the banking system and the creation of money, the most liquid form of money, and can also be seen as the central bank's monetary liabilities to society as a whole.

27. Formula: B=C (cash in circulation) + R (deposits held by financial institutions at the central bank) [including RR reserve deposits and ER excess reserves]

28. Factors affecting the deposit multiplier: statutory reserve ratio, cash leakage rate, excess reserve ratio.

29. The meaning of the money multiplier: The money multiplier indicates the elasticity of the money supply relative to base money, that is, the amount by which the central bank increases or decreases one unit of base money, which corresponds to an increase or decrease in the money supply. Denote △B as the change in base money, △Ms as the change in money supply, Km as the money multiplier, then:

Km=△Ms/△B=(△C+△D)/(△C+△R)

5. The main factors affecting the money multiplier and money supply: the behavior of residents holding money, the behavior of residents and enterprises, the behavior of commercial banks and financial institutions, and the money supply.

6. The behavior of the central bank and the money supply:

7. The central bank can influence the money multiplier and money supply by deciding the statutory reserve ratio r for demand deposits and the statutory reserve ratio rt for time deposits.

8. The scale of the central bank's claims on commercial banks affects base money and money supply.

9. The central bank's open market operations (mainly the scale of claims on the treasury) affect base money and money supply.

10. The scale of foreign exchange and gold holdings affects base money and money supply.

11. Classical theory of money demand: 1 Cash transaction quantity theory—Fisher's equation MV=PT;

Conclusion: Changes in the quantity of money M will lead to proportional changes in the price level P. The formula transforms to M=PT/V, when the money market is in equilibrium, the quantity of money M is the demand for money. It indicates that money demand is only a function of nominal income PT, and interest rates do not affect money demand.

2 Cash balance quantity theory—Cambridge equation M=KPY

Conclusion is consistent with Fisher's equation.

3. Keynes's theory of money demand—liquidity preference theory.

Three motives for money demand: transaction motive, precautionary motive, speculative motive.

Keynes's money demand function: (real money demand) Md/P=L1+L2=f(I,Y)

Keynes divides assets into money and bonds. The interest rate is inversely related to money demand.

4. Square root formula: Baumol and Tobin believe that transactional money demand is not only related to income but also to market interest rates, that is, transactional money demand is an increasing function of real income and a decreasing function of market interest rates.

Conclusion: Other conditions being equal, the higher the transaction volume or national income, the greater the demand for transactional money; the higher the conversion cost between money and profitable assets, the greater the demand for transactional money; if interest rates rise, the demand for transactional money decreases; if interest rates fall, the demand for transactional money increases.

5. Development of precautionary money demand—Whelan model (cube root formula).

The above formula indicates that the optimal precautionary cash balance is positively correlated with the variance S2 of the distribution of net expenditures and negatively correlated with the opportunity cost rate r of holding cash balances. This is the Whelan model formed on the basis of Keynes's theory of money demand.

6. Tobin's asset choice theory

7. Friedman's theory of money demand—modern quantity theory of money

Factors affecting money demand: total wealth, represented by "permanent income," which is positively correlated with money demand; wealth structure, that is, the proportion of human wealth and non-human wealth in total wealth; expected returns on various assets (the opportunity cost of holding money); preferences of wealth holders and the utility of holding money.

8. Comparison of Keynes's money demand theory and modern quantity theory of money

9. Keynes studies money demand from the perspective of psychological motives; Friedman, on the other hand, ignores people's motives for holding money and believes that factors affecting the demand for other assets must also affect money demand.

10. Keynes believes that money demand is merely a function of income and interest rates; Friedman believes that money demand is not only a function of income and interest rates but also a function of the expected returns on all assets.

11. Friedman breaks the limitation of Keynes's financial market, which only has money and bonds as available assets, believing that there are many assets available in the financial market, placing money at the center in contrast to other assets (stocks, bonds, commodities) to determine the demand for money based on the returns of other assets. This compensates for the defect of the Keynesian school placing money and other assets on an equal footing.

12. Keynes believes that interest rates are an important factor determining money demand; modern quantity theory believes that changes in interest rates have little effect on money demand.

13. Friedman believes that the money demand function is stable in the long term because permanent income and the opportunity cost of holding money are relatively stable; while Keynes, on the contrary, believes that money demand has large random fluctuations, and changes in interest rates and income significantly cause changes in money demand.

14. Another difference from Keynes is that Friedman regards money and commodities as substitutes, that is, the demand for money is affected by the expected returns on commodities, determining the position of expected factors in money demand, which has been overlooked by Keynes and his followers. At the same time, the assumption that commodities and money are substitutes indicates that changes in the quantity of money may have a direct impact on total spending and thus on total output.

15. 1. The ultimate goal of monetary policy: price stability (primary goal); full employment; economic growth; balance of payments.

16. The relationship between monetary policy goals: 1 Economic growth and full employment: a mutually complementary and mutually reinforcing relationship.

2 Price stability and full employment: there exists a trade-off effect in the short term. (Phillips curve)

3 Price stability and economic growth: there exists a trade-off effect in the short term, while in the long term, they are mutually prerequisite and mutually reinforcing.

4. Common forward intermediary targets: money supply, long-term interest rates, exchange rates

5. Common short-term intermediary targets: short-term money market interest rates, bank excess reserves, base money, inflation rates.

6. Friedman supports money supply, Keynes supports interest rates

7. Three major tools (general monetary policy): open market operations, discount rate, and statutory reserve ratio policy.

8. Other monetary policy tools: direct credit control and indirect credit control.

9. Keynes's monetary policy transmission mechanism theory: Keynes advocates that changes in the money supply indirectly affect industry and employment. According to Keynes's analysis, an increase or decrease in the money supply by the central bank will lead to a decrease or increase in interest rates. Under the condition of constant marginal efficiency of capital, a decrease in interest rates will lead to an increase in investment, while an increase in interest rates will lead to a decrease in investment. The increase or decrease in investment will, through the multiplier effect, cause changes in expenditure and income in the same direction. If M represents the money supply, r represents the interest rate, I represents investment, E represents expenditure, and Y represents income, then Keynes's monetary transmission mechanism theory can be expressed as: M rises ---- r falls ---- I rises --- E rises --- Y rises.

10. Tobin's Q theory: provides a theory about the interrelationship between stock prices and investment expenditure. If Q is high, the market value of the firm is higher than the replacement cost of capital for new plants and equipment. In this case, the company can issue fewer stocks and buy more investment goods, leading to an increase in investment expenditure. If Q is low, that is, the market value of the company is lower than the replacement cost of capital, firms will not purchase new investment goods. If a company wants to obtain capital, it will buy other cheaper firms to acquire old capital goods, thus reducing investment expenditure. The impact reflected in monetary policy is: when the money supply increases, stock prices rise, Tobin's Q rises, corporate investment expands, and thus national income also expands. According to Tobin's Q theory, the monetary policy transmission mechanism is: an increase in money supply ---- an increase in stock prices ---- an increase in Q ---- an increase in investment expenditure ---- an increase in total output.

11. Comparison of Keynesian and monetarist monetary policy transmission mechanisms

12. The Keynesian school places great importance on the role of interest rates in the monetary policy transmission mechanism, while the monetarist school, represented by Friedman, believes that the impact of monetary policy is not mainly through interest rates indirectly affecting investment and income, but because the money supply exceeds the real cash balances people need, thus directly affecting nominal income.

13. The Keynesian school believes that investment has a direct impact on output, employment, and GDP, while the monetarist school believes that changes in the money supply have a direct relationship with changes in nominal GDP.

14. The Keynesian school believes that the transmission mechanism first adjusts in the money market, then leads to an increase in investment, which increases consumption and national income, ultimately affecting the goods market. The monetarist school believes that the transmission mechanism can operate simultaneously in both the money market and the goods market, affecting both financial and real assets.

15. Main factors affecting monetary policy: policy lags, expectation factors, and institutional factors.

16. Reasons for innovation: one is innovation induced by constraints; the other is dialectical innovation of regulation.

Economic effects of interest rate changes

Micro: 1. Impact on investment. 1 Physical investment: other conditions being equal, interest rates affect investment costs, thus affecting final investment. An increase in interest rates means an increase in the cost of investment for enterprises, which will reduce profits after investment, leading to a decrease in investment scale. 2 Securities investment: if interest rates fall, demand will rise, leading to an increase in securities prices, which will increase profits after purchase.

2. Impact on consumption and savings. When interest rates are high, the return on assets increases, which means that the cost of current consumption rises, leading to a decrease in consumption and an increase in savings. High interest rates will lead to a reduction in enterprise scale, which will lead to a decrease in personal income and consumption.

3. Impact on the asset structure of financial institutions: Loan interest rates are determined by financial institutions based on market supply and demand, while the interest rates for securities investment are determined by the central bank based on financial policy, mainly referring to government bonds, adjusting the ratio of loans and investments based on the interest rates between the two.

Macro: 1. Impact on money supply and demand: interest rates are positively correlated with supply and negatively correlated with demand. 2. Impact on money demanders: when loan interest rates fall, it stimulates fund demanders, leading to an increase in demand; conversely, when loan interest rates rise, it stimulates fund demanders, leading to a decrease in demand. 3. Impact on money investors: when deposit interest rates fall, it suppresses the desire to save, turning savings into liquidity.

2. Impact on inflation: when interest rates are high, investment decreases, leading to inflation; when the economy is in recession, lowering interest rates leads to deflation.

3. Balance of payments situation.